Modelling Electricity Markets

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[ECONOMICS OF ELECTRICITY MARKET] December 14, 2010 1 | P a g e School of Petroleum Management, Gandhinagar. [ECONOMICS OF ELECTRICITY MARKET] December 14, 2010 2 | P a g e School of Petroleum Management, Gandhinagar. PREFACE This project is chosen as under the guidelines of our revered professor Mr. Rasananda Panda. This is focused on the Economics involved in the Indian Electricity market currently undergoing restructuring and adopting the deregulated industry structure for better utilization of the resources and for providing choice and quality service to the consumers at economical prices. Focus of the paper is to explore different economic structural models in Indian electricity market, the negative externality in electricity, the power trading models and the financial feasibility of investments made in power plants. KEY WORDS: Electricity Economics, Power trading, Negative externality, Investment feasibility. SPM-Gandhinagar Authors PDPU 14/12/2010 [ECONOMICS OF ELECTRICITY MARKET] December 14, 2010 3 | P a g e School of Petroleum Management, Gandhinagar. EXECUTIVE SUMMARY This paper explores the pre-reform and post reform economic models which results into power market development in Indian electricity market. The study analyzed several economic models and the feasibility of Competition in Maharashtra with modeling the MH Electricity Market in the Cournot Framework. The concept of Optimal Plant Mix which is utilization of mix of electricity generating techniques, which mainly depends on the electricity demand curve is critically analyzed and economics of multi plant firm taking economics of Load Division into account is discussed. The environmental concerns related to power sector in India in terms of negative externality models and social values are also discussed. The effort is to quantify externalities, resulting from energy use, which often influence fiscal subsidy levels. The paper also tries to address the present demand supply gap in Indian Electricity market. Moreover the paper also explores the various econometric models in the power trading operations in Indian particularly power exchange which is presently at the nascent stage in India. With the enactment of Electricity Act 2003, Government of India has outlined the counters of a suitable enabling framework for the force for generators to innovate and operate in most efficient overall development of wholesale electricity market and economic manner in order to remain in business and introducing competition at various sectors. A restructured power recovers their cost. Other benefits of competitive market trading model for Indian scenario within the boundary of legal include customer benefits, generation economies of scale and framework is discussed in our study. The finding is that longer term contracts and growing MPPs (Merchant power plants) are the key growth drivers for the maturity of power trading in India. The paper discussed the optimum bidding strategies for Generating companies in India with the game theory perspective. The paper also analyzed the investment environment and the feasibility of wholesale electricity competition environment in Indian power sector with the financial feasibility calculations for putting up a new power plant. [ECONOMICS OF ELECTRICITY MARKET] December 14, 2010 4 | P a g e School of Petroleum Management, Gandhinagar. [ECONOMICS OF ELECTRICITY MARKET] December 14, 2010 5 | P a g e School of Petroleum Management, Gandhinagar. CONTENTS Preface ................................................................................................................................................................................... 2 Executive Summary ......................................................................................................................................................... 3 Chapter 1 .............................................................................................................................................................................. 8 Introduction ........................................................................................................................................................................ 8 Industry Structure .................................................................................................................................................... 10 Industry Scenario ...................................................................................................................................................... 11 Generation ............................................................................................................................................................... 11 Transmission .......................................................................................................................................................... 12 Distribution ............................................................................................................................................................. 13 Chapter 2 ........................................................................................................................................................................... 15 Modelling Electricity Markets ................................................................................................................................... 15 Cost of Production .................................................................................................................................................... 15 Decreasing Average Costs ................................................................................................................................. 16 Increasing Average Costs .................................................................................................................................. 17 Power Market Development in India ................................................................................................................ 17 Monopoly in Indian Electricity Market........................................................................................................ 17 Economics of Monopoly ..................................................................................................................................... 19 Oligopoly Market ....................................................................................................................................................... 22 Independent Power Producers (IPPs) ......................................................................................................... 22 Unbundling, Privatisation and Independent Regulation ..................................................................... 23 Economics of Oligopoly ...................................................................................................................................... 24 Competitive Markets................................................................................................................................................ 26 Why Competition? ................................................................................................................................................ 26 Evolvement of Competition.............................................................................................................................. 27 Challenges of Making Competition in Electricity Market .................................................................... 28 Analysing feasibility of Competition in Maharashtra ................................................................................. 30 Modelling the MH Electricity Market in the Cournot Framework ................................................... 32 Economics of Load Division .................................................................................................................................. 37 The Screening Curve Method .......................................................................................................................... 39 Optimal Plant Mix ...................................................................................................................................................... 41 Economics of multi plant firm.............................................................................................................................. 42 Chapter 3 ........................................................................................................................................................................... 45 Negative externalities and Power Markets: ........................................................................................................ 45 Externalities in Electricity: .................................................................................................................................... 45 Fossil fuel environmental externality: ......................................................................................................... 46 Getting the price: .................................................................................................................................................. 48 [ECONOMICS OF ELECTRICITY MARKET] December 14, 2010 6 | P a g e School of Petroleum Management, Gandhinagar. Full cost of Power plants: ....................................................................................................................................... 52 Life cycle Assessment/ Life Cycle Costing: ............................................................................